The US dollar is firmer against most major currencies today.
The implications the Jamaica coalition in Germany is understood to be less
likely to support a new vision for Europe in the aftermath of Brexit and the
Great Financial Crisis.
The euro’s low for the year was set
at the very start near $1.0340. The first quarter or so was spent
consolidating the gains in H2 16. It was trading below $1.06 in early
April. However, the turn, in the form of a gap higher opening on April
24, as it becomes clear that the
so-called populist-nationalist moment was not sweeping through Europe. This coincided with an inflation scare that
sent the euro toward $1.15 by mid-year.
The euro has been consolidating its gains this month and appears to have
carved out a topping pattern. Perhaps it has been helped by a seeming
pattern of unsourced European official comments when the euro pokes through
$1.20. Momentum traders are getting frustrated. It has become more
expensive to short the dollar against the euro. The spread between US Libor and the one-year cross-currency basis swap is near -35 bp which is dearest the
dollars have been here in H2 (the spread bottomed at the end of last year near
-52 bp). The two-year interest rate differential is near 2.14%
today, the highest since March. It has
steadily climbed since the end of Q2 when
it reached almost 1.90%.
The euro is making a new low for the month today. A convincing
break of $1.18 would seem to confirm the topping pattern. The
initial objective is near $1.16, though last month’s low was seen near $1.1660. A more aggressive
target is near $1.1425, which corresponds to a 38.2% retracement of this year’s
gains. There is an option for nearly 980 mln euros struck at
$1.1825 that expires in NY today.
If the euro-dollar exchange rate has become a bit less sensitive to
interest rate differentials, the dollar-yen rate remains very sensitive.
The correlation (on percent change) over the past 60 sessions of US 10-year
yield and dollar-yen remains historically high (~0.81). In fact, it does
not look like it has been higher since at least 2000 than it is today.
The 10-year US Treasury yield reached a high on September 20 near 2.29%.
The dollar reached a high against the yen the next day near JPY112.70.
Both have eased since, and today initial
support in both markets is seen near yesterday’s lows (~JPY111.50 and 2.21%).
There is a $660 mln option struck at JPY112 that expires in NY today. It
may not be in play unless US yields pop.
However, the US economic calendar is light. S&P CoreLogic
house prices are released shortly before the stock market opens, the report is
not typically a market mover. August new home sales are reported at the same time as the options
expire. A small bounce is expected
after the outsized 9.4% drop in July. Meanwhile, Fed officials speak all
morning, with the highlight being Yellen at 12:45 pm ET. It is her first
public statements since last week’s press conference.
Also in the US today, there is a special Republican contest for Attorney
General Sessions’ Senate seat. The contest is between a Republican
establishment pick, Strange, and Moore, a candidate more at home with the
Freedom Caucus. The election is billed
as a contest for the soul of the Republican Party. While the market
impact is likely to be minor, it may shape expectations for next year’s
primaries and mid-term elections (November 2018).
Sterling is being protected by
ideas that the BOE will hike rates,
becoming the third G7 country to do so this year (US and Canada being the other
two). Although May’s speech last week did not seem to be sufficient
for EU officials, it does not seem to be much of a factor for the market.
Sterling is consolidating the run-up in the first half of the month. Yesterday’s
sterling recorded a low near $1.3430, the lowest level since the day after the
BOE meeting and its surprisingly hawkish tone. A break of $1.3400 would
set up a test on the $1.3300-$1.3350 area, where several technical levels
converge.
Meanwhile, the euro is breaking down against sterling. It is at
two-month lows and is threatening the
mid-July lows near GBP0.8740 and key technical support near GBP0.8730. A
break of there could fan ideas of a move
toward GBP0.8500 as the parity plays are unwound.
The euro is pinned near
yesterday’s lows against the yen (~JPY132). A break of the
JPY131.70-JPY131.80 could spur a move toward JPY131, and possibly
JPY130.
Oil is coming in touch softer today
after Brent reached a two-year high yesterday
and WTI reached a four-month high.
The proximate trigger was news that Turkey threatened to cut of oil flowing
from Iraq’s Kurdistan. Iraq does not recognize the referendum for
independence by the Kurds, which would aggravate Turkey’s challenges. At
the same time, major producers are talking the market up, and reports suggest production cuts are beginning to
bite. Still, there is a significant spread between WTI and Brent.
In fact, the roughly $6.60 spread is the
widest in a couple of years. The deep discount of WTI speaks to relative
supply, but also some unique US developments. Many cite the ongoing
technological progress. This is
part of the story, but so is cheap credit and a certain regard for the
environment. The November contract rose to a little more than $52.10 but is coming off now. Initial
support is seen today in the $51.25-$51.50 area.